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Why Bitcoin, XRP, and Dogecoin Look Weak Today

By Rich Smith – Aug 30, 2021 at 10:36AM

Key Points

  • Crypto exchanges are restricting investors' ability to use leverage to trade crypto.
  • That's not entirely bad news.
  • But John Paulson says crypto will "go to zero" -- and that is bad news.

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One famous investor famously predicts: Crypto "will go to zero."

What happened

Cryptocurrency prices are starting off the week on a weak note Monday. Here's how a few of the best known names in the industry are faring as of 9:45 a.m. EDT:

  • Bitcoin (BTC -0.60%) is down 1.7% over the last 24 hours, according to data from Coindesk.  
  • XRP (XRP -2.23%), the token closely associated with Ripple, is doing a bit worse -- down 2.6%.
  • Dogecoin (DOGE -3.66%) slid 2.9%.

But on the bright side, Ethereum (ETH -0.10%) is off only 0.9%.

Token with a Bitcoin symbol overlaid on a falling stock chart.

Image source: Getty Images.

So what

So what's depressing cryptocurrency traders today? It might be a lack of leverage.

One of the lead articles on top cryptocurrency website Coindesk this morning is an opinion piece warning of "lower systemwide leverage" as cryptocurrency exchanges FTX and Binance restrict traders to 20 times leverage on their trades -- meaning when buying crypto, they must now pay 5% upfront on a purchase, instead of 1% previously.  

Although one other exchange, BitMEX (which still permits 100 times leverage), told Coindesk that 100 times leverage is "very rare" in its market, and most often a strategy used by traders who have the least money available to move markets, i.e., individual investors. In theory at least, restricting the leverage with which traders can trade should lower trading volumes to some extent -- and this has Coindesk thinking price swings in the cryptocurrency market should become "a touch tamer" going forward.

Now what

Of course, the taming of the markets should work both ways -- it should decrease the frequency and extremity with which cryptocurrency prices rise (bad for investors) but also the frequency and extremity with which cryptocurrency prices fall (good for investors).

But why would this even-handed effect result in the prices of Bitcoin, XRP, and Dogecoin just falling today? For the answer to that question, you're going to want to ask John Paulson, the hedge fund trader who rose to fame in 2008 for his prescient shorting of the housing bubble.

In an interview with Bloomberg over the weekend, Paulson touted the advantages of investing in gold, and contrasted them to the risks of investing in cryptocurrency, which he warned "are a bubble" and "a limited supply of nothing." Cryptocurrencies like Bitcoin and its ilk, explains Paulson, can go up because there is a limited supply of them that you can buy. But there's simply "no intrinsic value to any of the cryptocurrencies," and for that reason, he expects crypto -- all cryptocurrencies -- "will go to zero" eventually.  

A prediction like that one, from an investor with Paulson's reputation, is presumably the reason cryptocurrency prices are going down today.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Bitcoin Stock Quote
Bitcoin
BTC
$16,523.25 (-0.60%) $-99.49
Dogecoin Stock Quote
Dogecoin
DOGE
$0.09 (-3.66%) $0.00
Ethereum Stock Quote
Ethereum
ETH
$1,214.13 (-0.10%) $-1.20
XRP Stock Quote
XRP
XRP
$0.40 (-2.23%) $0.01

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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